Jackson Free Press

Hinds County's interest-rate swap won't always be the gift that keeps on giving. The fancy financial derivative deal has brought the county $4.4 million over four years thanks to historically low interest rates, county financial adviser Porter Bingham says. With the national economy on a glacially slow but eventual rise, though, the county may have the opportunity to end its swap with a profit, before interest rates begin climbing again in earnest.

Bingham, CEO of the Atlanta-based Malachi Group, approached the Hinds County Board of Supervisors with a twofold proposition at its Oct. 18 meeting.

First, he asked the board to renew a "collar" that protected the county from almost all risk associated with the swap. Next, he asked the board to give him approval in advance to terminate the swap if the market presented an opportunity for significant profit.

After the board voted unanimously to approve both of Bingham's requests, Board President Robert Graham joked that Bingham's presentation had "thoroughly confused" the supervisors.

In its simplest form, an interest-rate swap involves two parties exchanging interest payments. One party will swap its fixed-rate interest payments for another party's payments based on a floating rate tied to market trends. Governments and other organizations can use a swap to lock in a fixed interest rate on bonds that would otherwise carry a floating rate. They can also use them in the reverse, lowering the cost of their bond debt by betting that floating interest rates will rise above a fixed rate. Some municipalities, like Jefferson County, Ala., nearly went bankrupt with such bets when interest rates plummeted several years ago.

The county's interest-rate swap is far more esoteric, using two bond issues and two different floating rates. Bingham describes it as a "synthetic refinancing." It still follows the same basic trends, however, as the plain vanilla form: The swap's benefit to the county rises and falls depending on interest rates.

In July the board renewed the collar on the smaller portion of the interest-rate swap--one based on a $7.5 million bond issue. The collar on the larger portion, based on a $39.5 million chunk of bond debt, expired Oct. 15. For three years, it protected the county from suddenly owing money to its counter party in the transaction, Rice Financial Products, if interest rates trended unfavorably.

"Those collars have prevented the county from being exposed to the vagaries of the market," Bingham told supervisors.

This time, Bingham recommended that the board only renew the collar for six months, in part because interest rates are increasingly likely to rise. "What has made this transaction work for the county is that we put the collars on at a time when rates were much higher," Bingham said. "We can guess with some degree of certainty that if interest rates are at 40-year lows, at some point, as the economy begins to recover, then that pendulum will swing back in the other direction."

The likelihood of a rebound in interest rates also presents the county with the opportunity to end its swap while it is still profitable. Bingham said that the county might be able to end the transaction for an additional profit of between $1 million and $3 million. That figure depends on market trends, however.

Bingham said that the county would have to decide to stop the swap within a matter of hours to take advantage of such a profit.

"There will be a point in the not-too-distant future where this transaction, as it moves back to some normal yield curve, will show you an inordinate amount of profit," Bingham said. "(The decision) has to be somewhat immediate. You might be able to say, 'Let me call you back. Give me an hour. Give me two.' But you won't have a day or two or three."

As with any deliberative body, urgency is not the board's strong suit. Supervisors first appeared hesitant to grant any advance approval for ending the swap. "If it was sent to me, I wouldn't dare make a decision without consulting the other board members," Graham said. "I'm definitely not going to make a million-dollar decision on my own."

The board ultimately settled on a $1 million profit threshold for terminating the swap, the lower end of what Bingham said the county could expect to make. Supervisors unanimously approved a resolution giving County Administrator Carmen Davis the authority to sign off on the swap's termination if the million-dollar decision presents itself.

Previous Comments

ID

160675

Comment

I don't recall any public notice or legal ads on the two above cited bond issues. Lacey, could you ask the Supervisors or their Administrator when these bonds were advertised, approved and issued? I could contact the Supervisors but I'm sure they would respond to a request from the press quicker than they would respond to a lowly citizen and voter. Full dosclosure and transparency is good!

Author

FrankMickens

Date

2010-11-03T11:58:00-06:00